Silver, which is currently trading at Rs 68,453 per kilogram, has appreciated 21.7 per cent over the past three months.
Investors, however, shouldn’t get carried away by its recent performance and put their money in it.
Instead, they should evaluate its pros and cons and then take a considered decision based on their risk appetite.
China reopening driving price up
Silver has a dual character: About 70 per cent of its demand comes from industrial usage, while the rest comes from investment and jewellery demand.
China, the biggest consumer of silver, has reopened (from Covid-induced lockdowns).
“Its reopening is fuelling the rally in silver prices,” says Chintan Haria, head-investment strategy, ICICI Prudential Asset Management Company (AMC).
A number of base metals have rallied and silver has also followed suit.
Unlike debt instruments, precious metals don’t offer any yield.
Global central banks were hiking interest rates aggressively in the past.
Money flowed from precious metals to debt instruments (as their yields moved higher).
“Over the past three months, inflation has begun to cool down across the globe.
"There is anticipation that central banks will become less aggressive in hiking interest rates.
"This development has led to higher demand for precious metals,” says Ravi Gehani, fund manager, DSP Mutual Fund. Hence, gold and silver have both rallied.
Silver has a negative correlation with the dollar.
“It has done well because the dollar index has fallen during the past few months,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers.
Currently, the gold-silver ratio is at 80.6. It was in the 80s and 90s between April and November 2022.
The 10-year average is 76.
“When this ratio is higher than the long-term average, it means silver is undervalued and gold is overvalued.
"The higher-than-average ratio was one reason why silver outperformed gold over the past three months,” says Gehani.
A recent report by the Silver Institute said that the demand for silver exceeds supply currently.
“This is the first time in a decade that there has been a deficit in the supply of silver.
"That is also responsible for driving its price up,” says Gehani.
Future hinges on global recovery
If the global recovery gathers pace, silver could do well.
“Also, if Covid abates in China and it reopens without further disruption, that will lead to a rally in base metals and silver will also benefit,” says Pritam Patnaik, head-commodities and HNI (high networth individual), NRI (non-resident Indian) acquisition, Axis Securities.
The secular trend also points towards growing demand for silver as it is finding usage in several new-age industries.
“The industrial demand for silver, as a proportion of total demand, has risen due to its increasing application in modern, environment-friendly manufacturing of electric vehicles, solar panels, medical instruments, switches, satellites, etc,” says Haria.
It also finds usage in 5G technology.
Ramping up supply will not be easy.
“This will provide good support to the price of silver,” adds Haria.
On the other hand, if the global economy goes into a recession in 2023, that could lead to a sharp correction in silver prices, according to Patnaik.
Adds Gehani: “If a renewed wave of Covid causes the Chinese economy to shut down completely again, that would definitely affect silver adversely.”
A volatile asset
While silver tends to outperform gold during commodity bull cycles, it also tends to fall more.
Says Dhawan: “It is a pro-cyclical asset. During periods of industrial slowdown or economic downturns, it is likely to underperform.
"It can fall sharply within a short span and remain subdued for a long time.”
Its dual nature also makes it unpredictable. Says Patnaik: “Sometimes it tracks gold and sometimes base metals.
"This makes it hard to predict its future price movements.”
He warns that storage can be an issue if you invest directly in silver.
Investing via silver exchange-traded funds and fund of funds can take care of both safety and storage issues.
What you should do
While silver belongs to the precious metal basket, do not regard it as being similar to gold.
Gold is more of a protective, anti-cyclical asset that does well when equities are in the doldrums and the economic outlook is poor.
Silver is more of a risky asset that does well in times of economic expansion and performs in line with equities.
“Don’t invest more than 5 per cent of your portfolio in silver since you would already have risky assets like equities in it. Invest with at least a 7-10-year horizon so that its volatility gets smoothened out and you are able to get reasonable returns,” says Dhawan.
Invest gradually to get the benefit of rupee-cost averaging. If you invest a lump sum and there is a big drawdown, you could lose a lot of money within a short period.
Investors who lack the ability to tolerate high volatility may avoid silver.